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Risky Cash Flows

The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $6,250 and has an expected life of 3 years. Annual net cash flows from each project begin 1 year after the initial investment is made and have the following probability distributions:

Project A	Project B
Probability	Cash Flows	Probability	Cash Flows
0.2	$6,000	0.2	$0
0.6	6,750	0.6	6,750
0.2	7,000	0.2	16,000

BPC has decided to evaluate the riskier project at a 12% rate and the less risky project at a 9% rate.

What is the expected value of the annual cash flows from each project? Do not round intermediate calculations. Round your answers to the nearest dollar.

	Project A	Project B
Net cash flow	$	$

What is the coefficient of variation (CV)? (Hint: _B=$5,096.57 and CV_B=$0.70.) Do not round intermediate calculations. Round values to the nearest cent and CV values to two decimal places.

		CV
Project A	$
Project B	$

What is the risk-adjusted NPV of each project? Do not round intermediate calculations. Round your answers to the nearest cent.

Project A:		$
Project B:		$

If it were known that Project B is negatively correlated with other cash flows of the firm whereas Project A is positively correlated, how would this affect the decision?

This would tend to reinforce the decision to -Select-acceptrejectItem 9 Project B.

If Project B's cash flows were negatively correlated with gross domestic product (GDP), would that influence your assessment of its risk?

-Select-YesNoItem 10